Consider an economy with the following features Consumption, C= 100 + 0.9 Y, Income tax, t=-Y 3. Investment, I= 600 – 30 i Government expenditure, G= 300 Transaction demand money for M, 0.4Y Speculative demand for money, M,=- 50 i Nominal money supply M = 1040 %3D Price level = 2 (where Y,stands for disposable income, and i for rate of interest) Derive the IS and LM equations and fund out the equilibrium levels of income and rate of interest.

Consider an economy with the following features Consumption, C= 100 + 0.9 Y, Income tax, t=-Y 3. Investment, I= 600 – 30 i Government expenditure, G= 300 Transaction demand money for M, 0.4Y Speculative demand for money, M,=- 50 i Nominal money supply M = 1040 %3D Price level = 2 (where Y,stands for disposable income, and i for rate of interest) Derive the IS and LM equations and fund out the equilibrium levels of income and rate of interest.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1- Consider the following IS-LM model: I= 150 + 25Y - 1000i, (M/P 2Y 8000i, G=250, T= 200 C=200 + 25YD. NX 0, M/P = 1600. a) Derive the IS relation b) Derive the LM relation. c) Solve for equilibrium real output (Y*). d) Solve for the equilibrium interest rate (i*) e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. ) Now suppose that the money supply increases to M/P =1,840. Solve for Y, i c, and T, and describe in words the effects of an expansionary monetary policy. g) Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, 1. C. h) The expansionary fiscal policy in part (g) have resulted in large budget deficit (T= G = 200 – 400 = -200). Suggest a policy mix to decrease fiscal deficit to achieve a balanced budget (T = G = 0). b(Ctrl) - 立

Which statement best describes the investment savings schedule in the IS/LM model? Oa. The investment savings curve represents the locus of combinations of the interest rate and output which satisfy equilibrium in the goods market. Ob. The investment savings curve represents the locus of combinations of the interest rate and output which satisfy equilibrium in the money market. Oc The investment savings curve represents the locus of combinations of the price level and output which satisfy equilibrium in the money market. Od. The investment savings curve represents the locus of combinations of the price level and output which satisfy equilibrium in the goods market. Oe The investment savings curve represents the locus of combinations of the interest rate and the price level which satisfy equilibrium in the goods market.
1. [Matrix Inversion in IS-LM Model] Given the IS equation 0.4Y +150r – 847.75 = 0, and the LM equation 0.1Y – 250r – 158.75 = 0, find the equilibrium level of national income Y and the interest rate r by using the technique of matrix inversion.
John has nominal wealth of $100,000. He wants to invest his wealth in money (a chequing account) and government bonds such that he invests $50,000 in bonds and $5,000 more in bonds for every percentage point that the interest rate on bonds (i) exceeds that interest rate on his chequing account (i"). 1. Derive an algebraic formula that describes John's nominal demand for bonds (B°)? 2. Derive an algebraic formula to describe John's nominal demand for money (Mª) as a function of bonds and the interest rate on the chequing account. 3. Solve for the sum of John's nominal demand for money and nominal demand for bonds. 4. Suppose that John is a representative consumer of all individuals in the economy, that the fixed asset supplies per person are $80,000 of bonds and $20,000 of chequing accounts, and the chequing accounts do not pay interest. What is the interest rate on bonds at asset market equilibrium? a. Solve using the money market condition. b. Solve using the asset market condition.…
I need help with e, f and g
Consider an economy that begins in a situation in which output equals potential output. Consider the modified representation of the IS-LM diagram in which the y-axis is the nominal interest rate versus the real interest rate, where we take into account the presence of the zero lower bound (Graph A). Suppose that a collapse in house prices impacts the economy. 1. Use either the 4-point curved line drawing tool or the line drawing tool to show the effect on either the IS or the LM curve. Hint: Only one curve will shift. 2. Use the point drawing tool to indicate the new equilibrium output and nominal interest rate. Carefully follow the instructions above and only draw the required objects. Graph A 0- урот e₁ LM IS Select Line 4-point Curve Point
b
Consider a simple macro model with a constant price-level and demand-determined output. The equations of the model are: • C- 125 + 0.85YD • I= 50 G = 200 T= 0.20Y •X 125 • IM = 0.25Y Total autonomous spending in this model is: (Nearest dollar.) Your Answer:
Assume the following IS-LM model: Expenditure sector:C = 100 + (4/5)YD G = 120 I = 300 - 20i YD = Y - TA NX = -20 TA = (1/4)Y Money sector: M = 700 P = 2 Md = (1/3)Y + 200 - 10i a) Derive the IS and LM equations for the above model. b) Draw the IS and LM curves. What are the equilibrium values of output (Y) and interest rate (i)? Show these values on the graph you drew. Derive the equilibrium values of consumption (C) and money demand (Md). c) How much investment (I) will be crowded out if the government increases its purchases by DG = 160 and nominal money supply (M) remains unchanged? Show how this increase in government purchases would affect the graph in part (b) by drawing a new graph.
Consider the following IS–LM model: C = 100 + .25YD I = 50 + .25Y - 1000i G = 150 T = 100 (M/P) d = 2Y - 8000i (M/P)s = 1000 a. Derive the IS relation b. Derive the LM relation c. Solve for equilibrium real output. d. Solve for the equilibrium interest rate e. Solve for the equilibrium values of C and I f. now suppose that the money supply increases to M/P = 1010. Solve for T, f. suppose that government spending increases to G = 155 What is the value of money supply? g. From what we studied, which policy, expansionary fiscal policy or expansionary monetary policy will undoubtedly increase investment.
Sometimes understanding of ISLM becomes clearer when one works through the algebra. This question is designed to promote such understanding. Consider Country A, a closed economy characterized by the following relationships: C = 200 + 0.5YD I = 70- 5r G = T = 100 MD = 500 + Y – 15i where YD, disposable income, is equal to income less taxes, Y-T, and r and i are the real and nominal interest rates expressed in percent. Country A is ruled by a fierce dictator who abhors price movements, so assume prices are not allowed to change in this economy, i.e., that i = r. a) Assume that the Central Bank of Country A sets the nominal interest rate at 4% (r=4) and keeps it at that level. Find consumption, investment and output in equilibrium. b) What money supply is consistent with a real interest rate of 4 percent? Given this money supply, show that saving equals investment.
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